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Cannabis short-sellers may be forced to cover soon as huge losses pile up, says S3 Partners

Last updated: 19:23 19 Sep 2018 BST, First published: 17:53 19 Sep 2018 BST

Investor in distress
Short-sellers may be forced to abandon positions against Canadian cannabis companies

Short-sellers of Canadian cannabis companies such as Tilray Inc (NASDAQ:TLRY) are losing millions of dollars daily and may be forced to cut their losses by covering their positions soon, according to a report by S3 Partners published Wednesday.

"This is such a quick and painful loss," Ihor Dusaniwsky, the managing director of predictive analytics in S3 Partners, told Proactive Investors in an interview. "These are the big losses today in the cannabis side."

S3, which specializes in using analytics to gauge investment processes, risk management, counterparty relationships and investor relations, monitors short-sellers in financial markets.

"Short sellers are positioning themselves for a pullback in what they believe is an overheated sector, but holding on to their positions is becoming an expensive proposition," he said in a report issued on Monday.

"The average cost to borrow stocks in the Cannabis sector is 21.8% fee and short sellers are paying over US$2.4mln/day in stock borrow financing costs. Shorting a sector ETF is usually a cheaper alternative, but the two main cannabis ETFs are only slightly less expensive at an average of 20.8% fee."

READ: Tilray CEO encourages pharma and booze companies to enter the cannabis space

Dusaniwsky said the mark-to-market losses of all of the companies or investors shorting the Canadian cannabis sector will hit US$275mln on this day alone because their prices are shooting higher. The cost of paying fees just to maintain a position could reach US$3.4mln daily.

For Tilray alone, Dusaniwsky said short-sellers are already down in mark-to-market losses by US$272mln and the year-to-date tab now stands at US$435mln. "Virtually no short-selling today" in Tilray, he said.

He warned a squeeze may be seen in Tilray, Green Organic Dutchman and the Cronos Group where stock borrows are going at 50% fee levels.

"If stock loan recalls and mark-to-market losses continue to accumulate in Tilray, Green Organic and Cronos, we could be on the verge of squeezes in these three stocks," Dusaniwsky said.

Such huge losses make it understandable why short-sellers such as Citron Research are hammering the short argument against Tilray, among others.

The shorts are suffering in particular after Tilray received permission from the US to supply medical cannabis to a study in California, sparking a furious rally in the stock on Wednesday to trade at a 52-week high of US$248, up  60% on the day. The stock had already closed on Tuesday up by 28.95% to US$154.98.

The surge in Tilray has lifted other cannabis stocks as well. Aurora Cannabis Inc shares in Canada jumped 9.7% to trade at C$12.10.

Dusaniwsky believes that at some point, "there will be some covering on the short side" if prices of Canadian cannabis companies keep marching higher, especially since some shorts do not have "the deep pockets" to sustain their bet against those companies.

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